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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-34094

 

VANTAGE DRILLING COMPANY

(Exact name of Registrant as specified in its charter)

 

 

Cayman Islands

 

N/A

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

777 Post Oak Boulevard, Suite 800

Houston, TX 77056

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (281) 404-4700

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨ (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No   x

The number of Vantage Drilling Company ordinary shares outstanding as of July 18, 2014 is 306,200,417 shares.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

2


 

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements relate to our plans, goals, strategies, intent, beliefs and current expectations. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Items contemplating or making assumptions about our industry, business strategy, goals, expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information also constitute such forward-looking statements. You should not place undue reliance on these forward-looking statements. These forward-looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.). Our actual results could differ materially from those anticipated in these forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties associated with the following:

·

our small number of customers;

·

credit risks of our key customers and certain other third parties;

·

reduced expenditures by oil and natural gas exploration and production companies;

·

termination of our customer contracts;

·

general economic conditions and conditions in the oil and gas industry;

·

delays and cost overruns in construction projects;

·

competition within our industry;

·

limited mobility between geographic regions;

·

operating hazards in the oilfield service industry;

·

ability to obtain indemnity from customers;

·

adequacy of insurance coverage upon the occurrence of a catastrophic event;

·

operations in international markets;

·

governmental, tax and environmental regulation;

·

changes in legislation removing or increasing current applicable limitations of liability;

·

effects of new products and new technology on the market;

·

our substantial level of indebtedness;

·

our ability to incur additional indebtedness;

·

compliance with restrictions and covenants in our debt agreements;

·

identifying and completing acquisition opportunities;

·

levels of operating and maintenance costs;

·

our dependence on key personnel;

·

availability of workers and the related labor costs;

·

increased cost of obtaining supplies;

·

the sufficiency of our internal controls;

·

changes in tax laws, treaties or regulations;

·

any non-compliance with the U.S. Foreign Corrupt Practices Act;

·

our obligation to repurchase certain indebtedness upon a change of control or other triggering events;

·

various risks in our relationship with F3 Capital and its affiliates; and

3


 

·

our incorporation under the laws of the Cayman Islands and the limited rights to relief that may be available compared to U.S. laws.

Many of these factors are beyond our ability to control or predict. Any, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in our filings with the Securities and Exchange Commission (the “SEC”), which may be obtained by contacting us or the SEC. These filings are also available through our website at www.vantagedrilling.com or through the SEC’s Electronic Data Gathering and Analysis Retrieval system (EDGAR) at www.sec.gov. The contents of our website are not part of this Quarterly Report.

Unless the context indicates otherwise, all references to “we,” “our” or “us” refer to Vantage Drilling Company and its consolidated subsidiaries.

 

 

 

4


 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

Vantage Drilling Company

Consolidated Balance Sheet

(In thousands, except par value information)

 

 

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

(Unaudited)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

88,976

 

 

$

54,686

 

 

Restricted cash

 

 

 

 

 

2,125

 

 

Trade receivables

 

 

154,667

 

 

 

168,654

 

 

Inventory

 

 

60,872

 

 

 

55,804

 

 

Prepaid expenses and other current assets

 

 

18,890

 

 

 

23,717

 

 

Total current assets

 

 

323,405

 

 

 

304,986

 

 

Property and equipment

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

3,493,052

 

 

 

3,472,407

 

 

Accumulated depreciation

 

 

(344,640

)

 

 

(281,759

)

 

Property and equipment, net

 

 

3,148,412

 

 

 

3,190,648

 

 

Other assets

 

 

 

 

 

 

 

 

 

Investment in joint venture

 

 

32,247

 

 

 

32,482

 

 

Other assets

 

 

82,718

 

 

 

100,027

 

 

Total other assets

 

 

114,965

 

 

 

132,509

 

 

Total assets

 

$

3,586,782

 

 

$

3,628,143

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

57,662

 

 

$

65,115

 

 

Accrued liabilities

 

 

101,222

 

 

 

96,382

 

 

Current maturities of long-term debt and revolving credit agreement

 

 

53,500

 

 

 

63,500

 

 

Total current liabilities

 

 

212,384

 

 

 

224,997

 

 

Long–term debt, net of discount of $33,074 and $39,325

 

 

2,782,024

 

 

 

2,852,050

 

 

Other long-term liabilities

 

 

47,632

 

 

 

45,640

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

Preferred shares, $0.001 par value, 10,000 shares authorized; none

   issued or outstanding

 

 

 

 

 

 

 

Ordinary shares, $0.001 par value, 500,000 shares authorized; 306,161

   and 304,101 shares issued and outstanding

 

 

306

 

 

 

304

 

 

Additional paid-in capital

 

 

901,210

 

 

 

896,928

 

 

Accumulated deficit

 

 

(356,774

)

 

 

(391,776

)

 

Total shareholders’ equity

 

 

544,742

 

 

 

505,456

 

 

Total liabilities and shareholders’ equity

 

$

3,586,782

 

 

$

3,628,143

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

5


 

Vantage Drilling Company

Consolidated Statement of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling services

 

$

198,279

 

 

$

155,803

 

 

 

413,211

 

 

 

290,467

 

 

Management fees

 

 

5,969

 

 

 

2,410

 

 

 

10,551

 

 

 

5,608

 

 

Reimbursables

 

 

15,470

 

 

 

12,424

 

 

 

28,421

 

 

 

21,563

 

 

Total revenue

 

 

219,718

 

 

 

170,637

 

 

 

452,183

 

 

 

317,638

 

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

98,002

 

 

 

77,117

 

 

 

199,724

 

 

 

152,434

 

 

General and administrative

 

 

8,366

 

 

 

7,054

 

 

 

16,481

 

 

 

14,481

 

 

Depreciation

 

 

31,630

 

 

 

24,980

 

 

 

63,255

 

 

 

49,841

 

 

Total operating costs and expenses

 

 

137,998

 

 

 

109,151

 

 

 

279,460

 

 

 

216,756

 

 

Income from operations

 

 

81,720

 

 

 

61,486

 

 

 

172,723

 

 

 

100,882

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

11

 

 

 

74

 

 

 

24

 

 

 

170

 

 

Interest expense and other financing charges

 

 

(54,286

)

 

 

(51,255

)

 

 

(108,773

)

 

 

(110,917

)

 

Loss on debt extinguishment

 

 

(1,407

)

 

 

-

 

 

 

(1,513

)

 

 

(98,327

)

 

Other, net

 

 

(539

)

 

 

988

 

 

 

240

 

 

 

1,889

 

 

Total other income (expense)

 

 

(56,221

)

 

 

(50,193

)

 

 

(110,022

)

 

 

(207,185

)

 

Income (loss) before income taxes

 

 

25,499

 

 

 

11,293

 

 

 

62,701

 

 

 

(106,303

)

 

Income tax provision

 

 

15,321

 

 

 

7,077

 

 

 

27,699

 

 

 

12,682

 

 

Net income (loss)

 

$

10,178

 

 

$

4,216

 

 

$

35,002

 

 

$

(118,985

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.01

 

 

$

0.11

 

 

$

(0.39

)

 

Diluted

 

$

0.03

 

 

$

0.01

 

 

$

0.11

 

 

$

(0.39

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

6


 

Vantage Drilling Company

Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

 

2014

 

 

2013

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

35,002

 

 

$

(118,985

)

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation expense

 

 

63,255

 

 

 

49,841

 

 

Amortization of debt financing costs

 

 

5,918

 

 

 

6,588

 

 

Amortization of debt discount

 

 

5,676

 

 

 

1,835

 

 

Non-cash loss on debt extinguishment

 

 

1,513

 

 

 

6,070

 

 

Share-based compensation expense

 

 

4,284

 

 

 

3,652

 

 

Deferred income tax expense (benefit)

 

 

(343

)

 

 

764

 

 

Equity in loss of joint venture

 

 

235

 

 

 

256

 

 

Loss on disposal of assets

 

 

663

 

 

 

14

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

2,125

 

 

 

162

 

 

Trade receivables

 

 

13,988

 

 

 

11,576

 

 

Inventory

 

 

(5,068

)

 

 

(7,814

)

 

Prepaid expenses and other current assets

 

 

5,054

 

 

 

5,308

 

 

Other assets

 

 

10,521

 

 

 

(4,646

)

 

Accounts payable

 

 

(7,453

)

 

 

7,218

 

 

Accrued liabilities and other long-term liabilities

 

 

4,527

 

 

 

(58,946

)

 

Net cash provided by (used in) operating activities

 

 

139,897

 

 

 

(97,107

)

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(19,262

)

 

 

(45,130

)

 

Proceeds from sale of property and equipment

 

 

 

 

 

2

 

 

Net cash used in investing activities

 

 

(19,262

)

 

 

(45,128

)

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Proceeds from issuance of senior secured notes, net

 

 

 

 

 

775,000

 

 

Proceeds from issuance of term loan, net

 

 

 

 

 

344,750

 

 

Repayment of long-term debt

 

 

(76,261

)

 

 

(1,013,374

)

 

Repayment of revolving credit agreement, net

 

 

(10,000

)

 

 

 

 

Debt issuance costs

 

 

(84

)

 

 

(26,462

)

 

Net cash provided by (used in) financing activities

 

 

(86,345

)

 

 

79,914

 

 

Net increase (decrease) in cash and cash equivalents

 

 

34,290

 

 

 

(62,321

)

 

Cash and cash equivalents—beginning of period

 

 

54,686

 

 

 

502,726

 

 

Cash and cash equivalents—end of period

 

$

88,976

 

 

$

440,405

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

Interest

 

$

98,330

 

 

$

149,179

 

 

Taxes

 

 

12,804

 

 

 

9,286

 

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

 

 

Interest capitalized

 

$

(2,420

)

 

$

(7,751

)

 

Trade-in value on equipment upgrades

 

 

(922

)

 

 

 

 

Discount on repurchase of senior notes

 

 

(16

)

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

7


 

VANTAGE DRILLING COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Recent Events

Vantage Drilling Company is a holding company organized under the laws of the Cayman Islands on November 14, 2007 with no significant operations or assets, other than its interests in its subsidiaries. Through its direct and indirect subsidiaries, Vantage Drilling Company is an international offshore drilling contractor for the oil and gas industry focused on operating a fleet of modern, high-specification mobile offshore drilling units (“MODUs”). Our operating fleet currently consists of four ultra-premium jackup rigs and three ultra-deepwater drillships. Our global fleet is currently located in India, Southeast Asia and West Africa.

In the first six months of 2014, we repurchased in the open market $7.5 million of our 7.125% Senior Secured Notes (the “7.125% Senior Notes”).  In June 2014, we made an additional principal payment of $42.0 million on our $500 million Term Loan (the “2017 Term Loan). In August 2014, we repurchased in the open market $8.0 million of our 7.125% Senior Secured Notes.

 

 

2. Basis of Presentation and Significant Accounting Policies

Basis of Consolidation: The accompanying interim consolidated financial information as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 has been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and includes our accounts and those of our majority owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods, on a basis consistent with the annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The balance sheet at December 31, 2013 is derived from our December 31, 2013 audited financial statements. These interim financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain previously reported amounts have been reclassified to conform to the current period presentation.

Cash and Cash Equivalents: Includes deposits with financial institutions as well as short-term money market instruments with maturities of three months or less when purchased.

Restricted Cash: Consists of cash and cash equivalents established as debt reserves and posted as collateral for bid tenders and performance bonds.

Inventory: Consists of materials, spare parts, consumables and related supplies for our drilling rigs and is carried at the lower of average cost or market.

Property and Equipment: Consists of the costs of our drilling rigs, furniture and fixtures, computer equipment and capitalized costs for computer software. Drilling rigs are depreciated on a component basis over estimated useful lives ranging from five to thirty-five years on a straight-line basis as of the date placed in service. Other assets are depreciated upon placement in service over estimated useful lives ranging from three to seven years on a straight-line basis. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the gain or loss is recognized.

Interest costs and the amortization of debt financing costs related to the financings of our MODUs are capitalized as part of the cost while they are under construction and prior to the commencement of each vessel’s first contract. Total interest and amortization costs capitalized for assets under construction for the three and six months ended June 30, 2014 were $1.2 million and $2.4 million, respectively. Total interest and amortization costs capitalized for the three and six months ended June 30, 2013 were $3.0 million and $6.5 million, respectively. We evaluate the realization of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized would represent the excess of the asset’s carrying value over the estimated fair value.

8


 

Debt Financing Costs: Costs incurred with debt financings are deferred and amortized over the term of the related financing facility on a straight line basis which approximates the interest method.

Investment in Joint Venture: In November 2012, we acquired 41.9% of Sigma Drilling, Ltd. (“Sigma”), which had contracted to build an ultra-deepwater drillship, to be known as the Palladium Explorer, at STX Offshore & Shipbuilding Co. Ltd.’s (“STX”) shipyard in Korea. We are currently accounting for our interest in Sigma as an equity method investment. Accordingly, we recognize 41.9% of the profit or loss of Sigma as other income (expense) in our consolidated statement of operations with a corresponding adjustment to our investment in joint venture account. We capitalized interest on our investment in Sigma until September 2013 when STX suspended construction of the drillship. In January 2014, Sigma issued a termination notice to STX on the Palladium Explorer construction contract and Sigma terminated our construction management agreement. See “Note 4. Construction Supervision and Operations Management Agreements.” During the six-month period ended June 30, 2014, Sigma recognized a loss from operations consisting primarily of general administrative expenses.

The change in our investment in joint venture account was composed of the following (in thousands):

 

Balance, December 31, 2013

 

$

32,482

 

 

Vantage share of net losses

 

 

(235

)

 

Balance, June 30, 2014

 

$

32,247

 

 

 

Revenue: Revenue is recognized as services are performed based on contracted dayrates and the number of operating days during the period.

In connection with a customer contract, we may receive lump-sum fees for the mobilization of equipment and personnel or the demobilization of equipment and personnel upon completion. Mobilization fees received and costs incurred to mobilize a rig from one geographic market to another are deferred and recognized on a straight-line basis over the term of such contract, excluding any option periods. Costs incurred to mobilize a rig without a contract are expensed as incurred. Fees or lump-sum payments received for capital improvements to rigs are deferred and amortized to income over the term of the related drilling contract. The costs of such capital improvements are capitalized and depreciated over the useful lives of the assets. Upon completion of drilling contracts, any demobilization fees received are recorded as revenue. We record reimbursements from customers for rebillable costs and expenses as revenue and the related direct costs as operating expenses.

Rig and Equipment Certifications: We are required to obtain regulatory certifications to operate our drilling rigs and certain specified equipment and must maintain such certifications through periodic inspections and surveys. The costs associated with these certifications, including drydock costs, are deferred and amortized over the corresponding certification periods.

Income Taxes: Income taxes have been provided for based upon the tax laws and rates in effect in the countries in which operations are conducted and income is earned. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. We recognize interest and penalties related to income taxes in income tax expense.

Earnings per Share: Basic earnings (loss) per share have been based on the weighted average number of ordinary shares outstanding during the applicable period. Diluted earnings (loss) per share have been computed based on the weighted average number of ordinary shares and ordinary share equivalents outstanding in the applicable period, as if all potentially dilutive securities were converted into ordinary shares (using the treasury stock method).

The following is a reconciliation of the number of shares used for the basic and diluted earnings (loss) per share (“EPS”) computations:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

(In thousands)

 

 

Weighted average ordinary shares outstanding for basic EPS

 

 

306,080

 

 

 

302,063

 

 

 

305,683

 

 

 

301,596

 

 

 

Options and warrants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

Convertible notes

 

 

-

 

 

 

-

 

 

 

78,907

 

 

 

-

 

 

Adjusted weighted average ordinary shares outstanding for diluted EPS

 

 

306,080

 

 

 

302,063

 

 

 

384,590

 

 

 

301,596

 

 

9


 

 

The following is a reconciliation of the number of shares excluded from diluted EPS computations:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

(In thousands)

 

 

Options and warrants

 

 

2,097

 

 

 

2,534

 

 

 

2,097

 

 

 

2,534

 

 

Convertible notes

 

 

78,907

 

 

 

31,904

 

 

 

-

 

 

 

31,904

 

 

Future potentially dilutive ordinary shares excluded from diluted EPS

 

 

81,004

 

 

 

34,438

 

 

 

2,097

 

 

 

34,438

 

 

The warrants and share options are anti-dilutive as the exercise or conversion price of such securities exceeded the average market price of our shares for the applicable periods. The ordinary shares issuable for the convertible notes, if converted, are excluded as the effect of including convertible debt and the related adjustments to income under the “if-converted” method of computing diluted earnings per share is anti-dilutive for the applicable periods.

Concentration of Credit Risk: Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable. We maintain deposits in federally insured financial institutions in excess of federally insured limits. We monitor the credit ratings and our concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits. Some of our restricted cash is invested in certificates of deposit. We have a limited number of key customers, who are primarily large international oil and gas operators, national oil companies and other international oil and gas companies. Our contracts provide for monthly billings as services are performed and we monitor compliance with contract payment terms on an ongoing basis. Outstanding receivables beyond payment terms are promptly investigated and discussed with the specific customer. We did not have an allowance for doubtful accounts as of June 30, 2014 or December 31, 2013.

Share-Based Compensation: We account for share-based compensation using the fair value method as prescribed under U.S. GAAP. Restricted share grants are valued based on the market price of our ordinary shares on the date of grant and the fair value attributable to share options is calculated based on the Black-Scholes option pricing model. The fair values are amortized to expense over the requisite service period which is generally equivalent to the time required to vest the share options and share grants. We recognized approximately $2.1 million and $1.6 million of share-based compensation expense for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, we recognized $4.3 million and $3.7 million, respectively, of share-based compensation expense.

Use of Estimates: The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. While management believes current estimates are appropriate and reasonable, actual results could differ from those estimates.

Fair Value of Financial Instruments: The fair value of our short-term financial assets and liabilities approximates the carrying amounts represented in the balance sheet principally due to the short-term nature or floating rate nature of these instruments. At June 30, 2014, the fair value of the 7.125% Senior Notes, the 7.5% Senior Secured First Lien Notes (the “7.5% Senior Notes”), the 7.875% Senior Convertible Notes (the “7.875% Convertible Notes”) and the 5.50% Convertible Senior Notes (the “5.50% Convertible Notes”) discussed below under “Note 5. Debt” was approximately $781.9 million, $1.2 billion, $62.3 million and $102.2 million, respectively, based on quoted market prices, a Level 1 measurement.

Derivative Financial Instruments: We may use derivative financial instruments to reduce our exposure to various market risks, primarily interest rate risk. We have documented policies and procedures to monitor and control the use of derivatives. We do not engage in derivative transactions for speculative or trading purposes. At June 30, 2014 and December 31, 2013, we had no outstanding derivative instruments.

Recent Accounting Standards: In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP, including industry-specific guidance. The ASU is based on the principle that revenue is recognized when it transfers promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires significant additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, using either a full or a modified retrospective application approach. We are beginning the process of evaluating the impact the pronouncement will have on our consolidated financial statements and related disclosures.

10


 

 

3. Transactions with F3 Capital and Affiliates

F3 Capital Note

In connection with the acquisition of the Platinum Explorer, we issued a promissory note to F3 Capital (the “F3 Capital Note”). The F3 Capital Note accrues interest at 5% per annum and matures in January 2018. If we do not repay the F3 Capital Note on its scheduled maturity date or upon the occurrence of certain customary default provisions, the interest rate on any amounts outstanding under the F3 Capital Note will rise to 10% per annum. The F3 Capital Note contains a preemptive right covenant that provides F3 Capital with the right to purchase a pro-rata portion of any equity or convertible debt that we offer at a price per share less than the contingent conversion price of the F3 Capital Note so long as the F3 Capital Note is outstanding.

In August 2012, F3 Capital elected to apply $6.5 million aggregate principal amount of the F3 Capital Note as consideration for an equivalent amount of 7.875% Convertible Notes. We did not receive any cash proceeds from this direct placement.

We originally valued the F3 Capital Note based on our weighed average cost of capital which resulted in a discounted present value of $27.8 million. As of June 30, 2014, if we were to value the F3 Capital Note at our current weighted average cost of capital, the current discounted present value would be approximately $41.8 million, a Level 3 measurement. In July 2013, F3 Capital delivered formal notice to us that it believes we breached the F3 Capital Note. Among its claims, F3 Capital alleged that we failed to use commercially reasonable efforts to obtain shareholder approval for the issuance of shares upon the conversion of the F3 Capital Note. In connection with its claims, F3 Capital may attempt to accelerate the maturity of the F3 Capital Note in an amount totaling approximately $63.0 million of principal and interest, plus F3 Capital’s claims for penalties and additional interest in excess of $35.0 million. We believe we have met our obligations under the F3 Capital Note to use commercially reasonable efforts to obtain shareholder approvals, and have instituted an action for declaratory relief in the English High Court for purposes of obtaining a judicial determination on F3 Capital’s claims. We intend to vigorously defend our position. In recognition that the standards of what constitutes commercially reasonable efforts may be subject to interpretation, there can be no assurances that the court will agree with our interpretation.

Lawsuit

On August 21, 2012, we filed a lawsuit against Mr. Hsin-Chi Su, a former member of our Board of Directors and the owner of F3 Capital, our largest shareholder, asserting breach of fiduciary duties, fraud, fraudulent inducement and negligent misrepresentation, and unjust enrichment based on Mr. Su’s conduct in his dealings with the Company both immediately prior to and during his tenure as one of our directors. The lawsuit, styled Vantage Drilling Company vs. Hsin-Chi Su a/k/a Nobu Su, is currently pending in the 270th Judicial District Court of Harris County, Texas. In the lawsuit, we are seeking to recover actual and punitive damages as well as other relief, in each case, relating to our past transactions with Mr. Su and F3 Capital, including our joint venture with Mandarin Drilling Corporation, an entity formerly owned and controlled by Mr. Su, our acquisition of the Platinum Explorer from Mandarin Drilling Corporation and the financing thereof, and the acquisition of the Titanium Explorer. In conjunction with the pending lawsuit, on June 20, 2014, we received notice that Mr. Su had filed an Original Counterclaim and Third Party Petition against the Company and certain of the Company's current and former officers and directors. The counterclaim alleges fraud, breach of fiduciary duty and theft by the Company and certain of its current and former officers and directors in the Company's dealings with Mr. Su. Further, the counterclaim alleges that the Company has wrongfully obtained an injunction against Mr. Su. In his counterclaim, Mr. Su asks that the Company recover nothing in its suit against Mr. Su and seeks actual damages up to a maximum amount of $8 billion, exemplary damages and attorneys' fees. We intend to vigorously defend against the charges made in the counterclaim and pursue our claims, but we can provide no assurance as to the outcome of this legal action.

Drillship Construction Supervision Agreement

We had a construction supervision agreement with an affiliate of F3 Capital that entitled us to payments for supervising the construction of Hull 3608, an ultra-deepwater drillship. In November 2009, pursuant to the terms of the construction supervision agreement, the affiliate of F3 Capital cancelled the agreement. Management fee revenue of approximately $3.0 million for construction services rendered by us in 2009 prior to the suspension and cancellation has not been paid as of June 30, 2014, and remains currently due and payable. We have issued demand letters regarding payment of the overdue amount.

 

4. Construction Supervision and Operations Management Agreements

In September 2013, we signed an agreement to supervise and manage the construction of two ultra-deepwater drillships for a third party. We receive management fees and reimbursable costs during the construction phase of the two drillships, subject to a maximum amount for each drillship.

11


 

In connection with our November 2012 investment of $31 million for a 41.9% ownership interest in Sigma, we entered into an agreement to supervise and manage the construction of the Palladium Explorer. Pursuant to the terms of the construction management agreement, we were entitled to a fixed monthly management fee during the expected thirty-six month construction period for the vessel. In September 2013, we received notice from STX that it was suspending construction of the Palladium Explorer as a result of its negotiations to restructure its operations and finances with its lenders. In January 2014, Sigma issued a termination notice to STX as a result of unsuccessful negotiations to complete the construction of the Palladium Explorer, and Sigma terminated our construction management agreement. Sigma has received a refund of initial payments made on the Palladium Explorer, plus interest under a refund guarantee issued by an independent financial institution. In May 2014, we reached an agreement with Sigma regarding amounts owed to us under the construction management agreement, which resulted in payment to us of $4.0 million, including a $3.0 million termination fee. The remaining $1.7 million outstanding will be received on the earlier of the receipt of any further monies from STX or one year from the date of the agreement. With respect to our investment in Sigma, the shareholders of Sigma have approved a resolution that allows for a reduction in capital and the distribution of funds to its shareholders. While we believe we will recover substantially all of our investment, there can be no assurance that we will receive payments equal to the current amount of our investment in Sigma and the amounts due under the construction management agreement.

In October 2012, we reached an understanding with a contractor in Mexico to manage the construction and operations of a newbuild jackup rig. The contractor subsequently acquired a second jackup rig and ordered two additional rigs, and awarded us construction management contracts for each of the four rigs. Effective September 30, 2013, the contractor assumed construction management responsibilities for the third and fourth rigs, however, we continued to receive our management fees until mid-November. We managed the operations of the first two rigs in Mexico until May 31, 2014 when we transitioned the rig operations to the contractor. In connection therewith, we will receive a termination fee of $2.75 million, payable in six equal monthly installments, the first of which has been received.

In July 2010, we signed an agreement to supervise and manage the construction and marketing of the ultra-deepwater drillship the Dalian Developer. In September 2013, the agreement was modified and notice was given to us that the contract would terminate in six months. The agreement terminated in March 2014 and we have no further obligations with regard to the Dalian Developer.

 

5. Debt

Our debt was composed of the following:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

(In thousands)

 

 

7.5% Senior Notes, issued at par

 

$

1,150,000

 

 

$

1,150,000

 

 

7.125% Senior Notes, issued at par

 

 

767,473

 

 

 

775,000

 

 

$500 million 2017 Term Loan, net of discount of $5,419 and $7,109

 

 

390,081

 

 

 

455,391

 

 

$350 million 2019 Term Loan, net of discount of $4,117 and $4,561

 

 

341,508

 

 

 

342,814

 

 

5.50% Convertible Notes, net of discount of $7,986 and $9,923

 

 

92,014

 

 

 

90,077

 

 

7.875% Convertible Notes, net of discount of $1,843 and $2,130

 

 

54,657

 

 

 

54,370

 

 

Revolving credit agreement

 

 

 

 

 

10,000

 

 

F3 Capital Note, net of discount of $13,709 and $15,602

 

 

39,791

 

 

 

37,898

 

 

 

 

 

2,835,524

 

 

 

2,915,550

 

 

Less current maturities of long-term debt and revolving credit facility

 

 

53,500

 

 

 

63,500

 

 

Long-term debt

 

$

2,782,024

 

 

$

2,852,050

 

 

 

 7.5% Senior Notes and $500 Million 2017 Term Loan

In October 2012, Offshore Group Investment Limited, one of our wholly-owned subsidiaries, (“OGIL”) issued $1.150 billion in aggregate principal amount of 7.5% Senior Notes under an indenture. The 7.5% Senior Notes were issued at par, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The 7.5% Senior Notes mature on November 1, 2019, and bear interest from the date of their issuance at the rate of 7.5% per year. Interest on outstanding 7.5% Senior Notes is payable semi-annually in arrears, commencing on May 1, 2013. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.

12


 

Concurrently with the closing of the 7.5% Senior Notes, we entered into the 2017 Term Loan. The 2017 Term Loan was issued at 98% of the face value and initially had an interest rate of LIBOR plus 5%, with a LIBOR floor of 1.25%. The 2017 Term Loan has scheduled debt maturities, payable quarterly, of 5% in the first year and 10% in subsequent years with final maturity on October 25, 2017. The original issue discount, reported as a direct deduction from the face amount of the 2017 Term Loan, will be recognized over the life of the 2017 Term Loan using the effective interest rate method. The 2017 Term Loan is secured on a senior secured basis by us and certain of our subsidiaries.

In November 2013, the 2017 Term Loan was amended to modify the applicable interest rates to; (i) decrease the adjusted LIBOR margin from 5.0% to 4.0% per annum, (ii) decrease the LIBOR floor from 1.25% to 1.0% per annum and (iii) decrease the ABR margin from 4.0% to 3.0%. The amendment also reflected a decrease in the principal amount due from $500 million to $475 million as a result of us making scheduled principal repayments under the original note.

The net proceeds from the above described financings, after fees and expenses, of approximately $1.6 billion were used (i) to pay the total consideration and accrued and unpaid interest on a concurrent tender offer of $1.0 billion of OGIL’s existing debt and related consent solicitation, (ii) for general corporate purposes, including the funding of the final construction payment for the Tungsten Explorer drillship and (iii) to pay fees and expenses related to both of the financings, consent solicitation and related transactions.

In June 2014, we made an additional principal payment of $42.0 million on the 2017 Term Loan. In connection with this payment, we recognized a non-cash charge of approximately $1.4 million related to the write-off of deferred financing costs and original issuance discount on the debt.  

7.125% Senior Notes and $350 Million 2019 Term Loan

In March 2013, OGIL issued $775.0 million in aggregate principal amount of 7.125% Senior Notes under an indenture. The 7.125% Senior Notes were issued at par, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The 7.125% Senior Notes mature on April 1, 2023, and bear interest from the date of their issuance at the rate of 7.125% per year. Interest on outstanding 7.125% Senior Notes is payable semi-annually in arrears, commencing on October 1, 2013. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.

Additionally during March 2013, we entered into the $350 million 2019 Term Loan (the “2019 Term Loan”). The 2019 Term Loan was issued at 98.5% of the face value and bears interest at LIBOR plus 4.5%, with a LIBOR floor of 1.25%. The 2019 Term Loan has annual scheduled debt maturities of 1% of the original principal amount that are payable quarterly commencing in June 2013. The maturity date of the 2019 Term Loan is March 28, 2019. The original issue discount, reported as a direct deduction from the face amount of the 2019 Term Loan, will be recognized over the life of the 2019 Term Loan using the effective interest rate method. The 2019 Term Loan is secured on a senior secured basis by us and certain of our subsidiaries.

The net proceeds, after fees and expenses, from the 7.125% Senior Notes and the 2019 Term Loan of approximately $1.1 billion were used to retire approximately $1.0 billion of OGIL’s existing debt for total consideration of approximately $1.1 billion, including $92.3 million paid for the early redemption and consent fees and $18.2 million for accrued and unpaid interest. The balance of the proceeds was used for payment of transaction expenses and general corporate purposes.

In February 2014, we repurchased in the open market, and subsequently cancelled, $6.0 million of the 7.125% Senior Notes. In connection with this transaction, we recognized a non-cash charge of approximately $106,000 related to the early extinguishment of the debt. In May 2014, we repurchased, and subsequently cancelled, an additional $1.5 million of the 7.125% Senior Notes and recognized a non-cash charge of approximately $10,600 related to the early extinguishment of the debt.

5.50% Senior Convertible Notes

In July 2013, we issued $100 million aggregate principal amount of 5.50% Convertible Notes under an indenture. The 5.50% Convertible Notes will mature on July 15, 2043, unless earlier converted, redeemed or repurchased, and bear interest at a rate of 5.50% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2014. The 5.50% Convertible Notes are our senior, unsecured obligations, and rank senior in right of payment to all of our existing and future subordinated indebtedness and equal in right of payment with any of our other existing and future senior unsecured indebtedness, including our 7.875% Convertible Notes. The 5.50% Convertible Notes are structurally subordinated to all debt and other liabilities of our subsidiaries and are effectively junior to our secured debt to the extent of the value of the assets securing such debt. The net proceeds, after fees and expenses, of approximately $96.5 million were used to fund the initial payment of $59.5 million under the Cobalt Explorer construction contract and the remainder was used for general corporate purposes.

13


 

The 5.50% Convertible Notes are convertible into our ordinary shares, cash or a combination of ordinary shares and cash, at our election, based upon an initial conversion rate of 418.6289 ordinary shares per $1,000 principal amount of 5.50% Convertible Notes (equivalent to an initial conversion price of approximately $2.39 per ordinary share). In addition, for conversions by holders after July 15, 2013 and prior to July 15, 2016, converting holders are entitled to a conversion make-whole payment upon conversion.

The 5.50% Convertible Notes contain an embedded conversion option related to the cash settlement provisions and under U.S. GAAP is required to be separated into liability and equity components. We evaluated the 5.50% Convertible Notes based on the market terms of new, nonconvertible debt issuances made by companies with similar credit ratings, adjusting for the unsecured nature of the 5.50% Convertible Notes. Based on this evaluation, we determined that the fair value of the 5.50% Convertible Notes absent the conversion feature was approximately $88.3 million at issuance. The difference between the par value of the 5.50% Convertible Notes and the fair value at date of issuance is recorded as equity and as a discount to the face amount of the 5.50% Convertible Notes and is being amortized to interest expense over the expected life using the effective interest rate method.

The 5.50% Convertible Notes are subject to redemption at our option on or after July 15, 2016 and before July 15, 2018 if the volume weighted average price of our ordinary shares is greater than or equal to 150% of the applicable conversion price for at least 20 trading days during any 30 consecutive trading day period ending within five trading days prior to the notice of redemption. In addition, we may redeem the 5.50% Convertible Notes at any time on and after July 15, 2018. In each case, the redemption purchase price is equal to 100% of the principal amount of the 5.50% Convertible Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

The 5.50% Convertible Notes are subject to repurchase by us at the option of holders of the 5.50% Convertible Notes on July 15, 2016 and on July 15, 2018 for cash at a price equal to 100% of the principal amount of the 5.50% Convertible Notes being repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.

7.875% Senior Convertible Notes

In August 2012, we issued $56.5 million aggregate principal amount of 7.875% Convertible Notes under an indenture. The 7.875% Convertible Notes will mature on September 1, 2042, unless earlier converted, repurchased or redeemed, and bear interest at a rate of 7.875% per annum, payable semiannually, in arrears, on March 1 and September 1 of each year, commencing on March 1, 2013. The 7.875% Convertible Notes are our senior unsecured obligation and rank equal in payment with our other senior unsecured debt but are structurally subordinated to the debt of our subsidiaries as the 7.875% Convertible Notes are not guaranteed by any of our subsidiaries. We issued $6.5 million of the 7.875% Convertible Notes to F3 Capital. The net proceeds, after fees and expenses, of approximately $48.3 million were used to fund capital expenditures and working capital needs, and for general corporate purposes.

The 7.875% Convertible Notes are convertible into our ordinary shares, or a combination of cash and ordinary shares, if any, at our election, based upon an initial conversion rate of 476.1905 ordinary shares per $1,000 principal amount of 7.875% Convertible Notes (equivalent to an initial conversion price of approximately $2.10 per ordinary share). Holders of the 7.875% Convertible Notes may voluntarily elect to convert all, or any portion, of their holdings at any time. In addition, for any conversions prior to September 1, 2017, holders will be entitled to a make-whole payment upon conversion.

Due to the embedded conversion option related to the cash settlement provisions, we evaluated the 7.875% Convertible Notes based on the market terms of new, nonconvertible debt issuances made by companies with similar credit ratings, adjusting for the unsecured nature of the 7.875% Convertible Notes. Based on this evaluation, we determined that the fair value of the 7.875% Convertible Notes absent the conversion feature was approximately $53.6 million at issuance. The difference between the par value and the fair value at date of issuance of the 7.875% Convertible Notes was recorded as equity and as a debt discount, and is being amortized to interest expense over the expected life of the 7.875% Convertible Notes using the effective interest rate method

The 7.875% Convertible Notes are subject to redemption at our option on or after September 1, 2015 and before September 1, 2017 if the volume weighted average price of our ordinary shares is greater than or equal to 125% of the applicable conversion price for at least 20 trading days during any 30 consecutive trading day period. Further, the 7.875% Convertible Notes are subject to mandatory conversion at our option on or before September 1, 2015 if the volume weighted average price of our ordinary shares is greater than or equal to 150% of the applicable conversion price for at least 20 trading days during any 30 consecutive trading day period. In each case, the redemption purchase price is equal to 100% of the principal amount of the 5.50% Convertible Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

Credit Agreement

In June 2012, we entered into a secured revolving credit agreement (the “Credit Agreement”) to provide us with advances and letters of credit up to an aggregate principal amount of $25.0 million. In March 2013, in connection with the issuance of the 7.125%

14


 

Senior Notes and the 2019 Term Loan, we amended the Credit Agreement to increase the aggregate principal amount to $200.0 million, of which $32.0 million is reserved for letters of credit. The Credit Agreement will now mature on April 25, 2017. Advances under the Credit Agreement bear interest at the adjusted base rate (as defined in the Credit Agreement) plus a margin of 2.50% or LIBOR plus a margin of 3.50%, at our option. We may prepay outstanding advances subject to certain prepayment minimums at any time.

The Credit Agreement includes customary covenants and events of default, including covenants that, among other things, restrict the granting of liens on certain assets, restrict the incurrence of indebtedness and the conveyance of and modification to vessels and require us to maintain certain financial ratios and provide periodic financial reports. Advances under the Credit Agreement are secured by a lien on certain of our assets, which are substantially similar to those assets pledged in connection with the 7.125% Senior Notes, the 7.5% Senior Notes, the 2017 Term Loan and the 2019 Term Loan. We believe we were in compliance with all financial covenants of the Credit Agreement at June 30, 2014. As of June 30, 2014, we had issued letters of credit for $21.5 million under the Credit Agreement.

 

6. Shareholders’ Equity

Preferred Shares

We have 10,000,000 authorized preferred shares, par value $0.001 per share. As of June 30, 2014, no preferred shares were issued and outstanding.

Ordinary Shares

We have 500,000,000 authorized ordinary shares, par value $0.001 per share. Under our 2007 Long-Term Incentive Plan (the “LTIP”), we may issue a maximum of 45 million ordinary shares. During the six months ended June 30, 2014, we granted to employees and directors 4,266,869 time-vested restricted shares and 1,951,362 performance unit awards under our LTIP. Time-vested restricted share awards issued to employees vest ratably over four years, while awards to directors vest one year from date of grant. Performance unit awards vest over a three-year period based on the level of attainment of pre-determined criteria; upon vesting, each performance unit award may be converted to ordinary shares at a ratio ranging from 0 to 1.5. The value of the 2014 time-vested restricted share awards and performance units is amortized to expense over the respective vesting period based on the fair value of the awards at the grant dates, which was approximately $11.6 million, based on an average share price of $1.86 per share. For purposes of calculating the grant date fair value of the performance units, the target conversion ratio of one ordinary share for one performance unit was used. In the six months ended June 30, 2014, 1,973,565 of previously granted LTIP share awards vested. Additionally, in the six months ended June 30 2014, we issued 86,257 shares, valued at approximately $152,000, to directors in lieu of cash for directors’ fees.

 

7. Income Taxes

We are a Cayman Islands entity. The Cayman Islands does not impose corporate income taxes. Consequently, we have provided income taxes based on the tax laws and rates in effect in the countries in which operations are conducted, or in which we and/or our subsidiaries are considered resident for income tax purposes. We operate in multiple countries under different legal forms. As a result, we are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Our operations in these different jurisdictions are taxed on various bases including, (i) actual income before taxes, (ii) deemed profits (which are generally determined by applying a tax rate to revenues rather than profits) and (iii) withholding taxes based on revenue. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each tax jurisdiction could have an impact on the amount of income taxes that we provide during any given year.

We account for income taxes pursuant to ASC 740, Accounting for Income Taxes, which requires recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. We provide for deferred taxes on temporary differences between the financial statements and tax bases of assets and liabilities using the enacted tax rates which are expected to apply to taxable income when the temporary differences are expected to reverse. Deferred tax assets are also provided for certain tax credit carryforwards. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

In certain jurisdictions we are taxed under preferential tax regimes, which may require our compliance with specified requirements to sustain the tax benefits. We believe we are in compliance with the specified requirements and will continue to make

15


 

all reasonable efforts to comply, however, our ability to meet the requirements of the preferential tax regimes may be affected by changes in laws, our business operations and other factors affecting our company and industry, many of which are beyond our control.

Our periodic tax returns are subject to examination by taxing authorities in the jurisdictions in which we operate in accordance with the normal statutes of limitations in the applicable jurisdiction. These examinations may result in assessments of additional taxes that are resolved with the authorities or through the courts. Resolution of these matters involves uncertainties and there are no assurances as to the outcome. Our tax years 2008 forward remain open to examination in many of our jurisdictions and we are currently involved in several tax examinations in jurisdictions where we are operating or have previously operated. As information becomes available during the course of these examinations, we may increase or decrease our estimates of tax assessments and accruals.

 

8. Commitments and Contingencies

We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims. We do not believe the ultimate resolution of any existing litigation, claims or disputes will have a material adverse effect on our financial position, results of operations or cash flows.

On August 21, 2012, we filed a lawsuit against Mr. Hsin-Chi Su, a former member of our Board of Directors and the owner of F3 Capital, our largest shareholder, asserting breach of fiduciary duties, fraud, fraudulent inducement and negligent misrepresentation, and unjust enrichment based on Mr. Su’s conduct in his dealings with the Company both immediately prior to, and during his tenure as one of our directors. In June 2014, Mr. Su filed a countersuit against us and certain of our current and former officers and directors. See above under “Note 3. Transactions with F3 Capital and Affiliates—Lawsuit” for additional information.

We enter into operating leases in the normal course of business for office space, housing, vehicles and specified operating equipment. Some of these leases contain renewal options which would cause our future cash payments to change if we exercised those renewal options.

 

9. Supplemental Financial Information

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

(In thousands)

 

 

Prepaid insurance

 

$

6,009

 

 

$

13,178

 

 

Sales tax receivable

 

 

4,153

 

 

 

3,621

 

 

Income tax receivable

 

 

554

 

 

 

962

 

 

Current deferred tax asset

 

 

2,367

 

 

 

2,139

 

 

Other receivables

 

 

316

 

 

 

278

 

 

Deferred mobilization costs

 

 

 

 

 

665

 

 

Other

 

 

5,491

 

 

 

2,874

 

 

 

 

$

18,890

 

 

$

23,717

 

 

16


 

 

Property and Equipment, net

Property and equipment, net consisted of the following:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

(In thousands)

 

 

Drilling equipment

 

$

3,385,144

 

 

$

3,376,631

 

 

Assets under construction

 

 

87,711

 

 

 

75,993

 

 

Office and technology equipment

 

 

18,217

 

 

 

17,750

 

 

Leasehold improvements

 

 

1,980

 

 

 

2,033

 

 

 

 

 

3,493,052

 

 

 

3,472,407

 

 

Accumulated depreciation

 

 

(344,640

)

 

 

(281,759

)

 

Property and equipment, net

 

$

3,148,412

 

 

$

3,190,648

 

 

 

Other Assets

Other assets consisted of the following:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

(In thousands)

 

 

Deferred financing costs, net

 

$

49,358

 

 

$

56,145

 

 

Performance bond collateral

 

 

6,600

 

 

 

24,882

 

 

Deferred certification costs

 

 

6,947

 

 

 

6,494

 

 

Deferred agent fees

 

 

6,648

 

 

 

7,160

 

 

Deferred mobilization costs

 

 

11,616

 

 

 

4,066

 

 

Deposits

 

 

1,549

 

 

 

1,280

 

 

 

 

$

82,718

 

 

$

100,027

 

 

 

Accrued Liabilities

Accrued liabilities consisted of the following:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

(In thousands)

 

 

Interest

 

$

44,548

 

 

$

43,064

 

 

Compensation

 

 

20,692

 

 

 

20,045

 

 

Insurance premiums

 

 

2,534

 

 

 

10,136

 

 

Unearned income

 

 

 

 

 

615

 

 

Deferred revenue

 

 

7,344

 

 

 

8,928

 

 

Property, service and franchise taxes

 

 

 

 

 

1,610

 

 

Income taxes payable

 

 

22,041

 

 

 

7,577

 

 

Other

 

 

4,063

 

 

 

4,407

 

 

 

 

$

101,222

 

 

$

96,382

 

 

 

17


 

Other Long-Term Liabilities

Other long-term liabilities consisted of the following:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

(In thousands)

 

 

Deferred revenue

 

$

34,597

 

 

$

34,385

 

 

Deferred income taxes

 

 

2,687

 

 

 

2,801

 

 

Other non-current liabilities

 

 

10,348

 

 

 

8,454

 

 

 

 

$

47,632

 

 

$

45,640

 

 

 

10. Business Segment and Significant Customer Information

We aggregate our contract drilling operations into one reportable segment even though we provide contract drilling services with different types of MODUs, including jackup rigs and drillships, and in different geographic regions. Our operations are dependent on the global oil and gas industry and our MODUs are relocated based on demand for our services and customer requirements. Our customers consist primarily of large international oil and gas companies, national or government-controlled oil and gas companies and other international exploration and production companies. We also provide construction supervision and operations management services for drilling units owned by others.

For 2014 and 2013, the majority of our revenue was from countries outside of the United States. Consequently, we are exposed to the risk of changes in economic, political and social conditions inherent in foreign operations. Three customers accounted for approximately 24%, 24% and 21%, respectively, of consolidated revenue for the three months ended June 30, 2014. For the six months ended June 30, 2014, three customers accounted for 25%, 23% and 21%, respectively, of consolidated revenue. Two customers accounted for 31% and 25 %, respectively, of consolidated revenue for the three months ended June 30, 2013. For the six months ended June 30, 2013, two customers accounted for 33% and 23%, respectively, of consolidated revenue.

 

11. Supplemental Condensed Consolidating Financial Information

The 7.125% Senior Notes and 7.5% Senior Notes were issued under separate indentures and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by us and certain of our subsidiaries (the “Subsidiary Guarantors”). Our other subsidiaries have not guaranteed or pledged assets to secure the 7.125% Senior Notes or the 7.5% Senior Notes (collectively, the “Non-Guarantors”).

The following tables present the condensed consolidating financial information as of June 30, 2014 and 2013 and for the three and six months ended June 30, 2014 and 2013 of (i) Vantage Drilling Company (the “Parent”), (ii) OGIL, (iii) the Subsidiary Guarantors, (iv) the Non-Guarantors and (v) consolidating and elimination entries representing adjustments to eliminate (a) investments in our subsidiaries and (b) intercompany transactions.

The financial information reflects all adjustments which are, in management’s opinion, necessary for a fair presentation of the financial position as of June 30, 2014 and 2013 and results of operations for the three and six months ended June 30, 2014 and 2013, respectively.

18


 

Condensed Consolidating Balance Sheet (in thousands)

 

 

 

As of June 30, 2014

 

 

 

 

Parent

 

 

OGIL

 

 

Subsidiary Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,582

 

 

$

1,324

 

 

$

72,527

 

 

$

12,543

 

 

$

 

 

$

88,976

 

 

Other current assets

 

 

636

 

 

 

354

 

 

 

215,197

 

 

 

18,242

 

 

 

 

 

 

234,429

 

 

Total current assets

 

 

3,218

 

 

 

1,678

 

 

 

287,724

 

 

 

30,785

 

 

 

 

 

 

323,405

 

 

Property and equipment, net

 

 

 

 

 

1,208

 

 

 

2,857,848

 

 

 

102,420

 

 

 

186,936

 

 

 

3,148,412

 

 

Investment in and advances to subsidiaries

 

 

653,629

 

 

 

1,433,214

 

 

 

1,053,496

 

 

 

2,104

 

 

 

(3,142,443

)

 

 

 

 

Investment in joint venture

 

 

 

 

 

 

 

 

 

 

 

32,247

 

 

 

 

 

 

32,247

 

 

Other assets

 

 

10,189

 

 

 

45,817

 

 

 

21,941

 

 

 

4,771

 

 

 

 

 

 

82,718

 

 

Total assets

 

$

667,036

 

 

$

1,481,917

 

 

$

4,221,009

 

 

$

172,327

 

 

$

(2,955,507

)

 

$

3,586,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

24,844

 

 

$

28,171

 

 

$

71,199

 

 

$

34,670

 

 

$

 

 

$

158,884

 

 

Current maturities of long-term debt

 

 

 

 

 

53,500

 

 

 

 

 

 

 

 

 

 

 

 

53,500

 

 

Intercompany (receivable) payable

 

 

(308,125

)

 

 

(867,106

)

 

 

1,079,419

 

 

 

95,812

 

 

 

 

 

 

 

 

Total current liabilities

 

 

(283,281

)

 

 

(785,435

)

 

 

1,150,618

 

 

 

130,482

 

 

 

 

 

 

212,384

 

 

Long-term debt

 

 

186,463

 

 

 

2,595,561

 

 

 

 

 

 

 

 

 

 

 

 

2,782,024

 

 

Other long term liabilities

 

 

 

 

 

 

 

 

38,952

 

 

 

8,680

 

 

 

 

 

 

47,632

 

 

Shareholders’ equity (deficit)

 

 

763,854

 

 

 

(328,209

)

 

 

3,031,439

 

 

 

33,165

 

 

 

(2,955,507

)

 

 

544,742

 

 

Total liabilities and shareholders’ equity

 

$

667,036

 

 

$

1,481,917

 

 

$

4,221,009

 

 

$

172,327

 

 

$

(2,955,507

)

 

$

3,586,782

 

 

 

Condensed Consolidating Statement of Operations (in thousands)

 

 

Three Months Ended June 30, 2014

 

 

 

 

Parent

 

 

Issuer

 

 

Subsidiary Guarantors

 

 

Non-Guarantors

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

 

$

 

 

$

207,068

 

 

$

12,650

 

 

$

219,718

 

 

Operating costs and expenses

 

 

2,492

 

 

 

157

 

 

 

119,026

 

 

 

16,323

 

 

 

137,998

 

 

Income (loss) from operations

 

 

(2,492

)

 

 

(157

)

 

 

88,042

 

 

 

(3,673

)

 

 

81,720

 

 

Other, net

 

 

(4,574

)

 

 

(51,117

)

 

 

(189,089

)

 

 

188,559

 

 

 

(56,221

)

 

Income (loss) before income taxes

 

 

(7,066

)

 

 

(51,274

)

 

 

(101,047

)

 

 

184,886

 

 

 

25,499

 

 

Income tax provision (benefit)

 

 

 

 

 

 

 

 

14,514

 

 

 

807

 

 

 

15,321

 

 

Net income (loss)

 

$

(7,066

)

 

$

(51,274

)

 

$

(115,561

)

 

$

184,079

 

 

$

10,178

 

 

Condensed Consolidating Statement of Operations (in thousands)

 

 

 

Six Months Ended June 30, 2014

 

 

 

 

Parent

 

 

OGIL

 

 

Subsidiary Guarantors

 

 

Non-Guarantors

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

 

$

 

 

$

427,783

 

 

$

24,400

 

 

$

452,183

 

 

Operating costs and expenses

 

 

3,730

 

 

 

310

 

 

 

243,052

 

 

 

32,368

 

 

 

279,460

 

 

Income (loss) from operations

 

 

(3,730

)

 

 

(310

)

 

 

184,731

 

 

 

(7,968

)

 

 

172,723

 

 

Other, net

 

 

(9,169

)

 

 

(101,112

)

 

 

(188,508

)

 

 

188,767

 

 

 

(110,022

)

 

Income (loss) before income taxes

 

 

(12,899

)

 

 

(101,422

)

 

 

(3,777

)

 

 

180,799

 

 

 

62,701

 

 

Income tax provision (benefit)

 

 

 

 

 

 

 

 

26,237

 

 

 

1,462

 

 

 

27,699

 

 

Net income (loss)

 

$

(12,899

)

 

$

(101,422

)

 

$

(30,014

)

 

$

179,337

 

 

$

35,002

 

 

 

19


 

Condensed Consolidating Statement of Cash Flows (in thousands)

 

 

 

Six Months Ended June 30, 2014

 

 

 

 

Parent

 

 

OGIL

 

 

Subsidiary Guarantors

 

 

Non-Guarantors

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(18,789

)

 

$

(91,178

)

 

$

243,655

 

 

$

6,209

 

 

$

139,897

 

 

Net cash provided by (used in) investing activities

 

 

 

 

 

(217

)

 

 

(3,571

)

 

 

(15,474

)

 

 

(19,262

)

 

Net cash provided by (used in) financing activities

 

 

17,882

 

 

 

87,252

 

 

 

(205,045

)

 

 

13,566

 

 

 

(86,345

)

 

Net increase in cash and cash equivalents

 

 

(907

)

 

 

(4,143

)

 

 

35,039

 

 

 

4,301

 

 

 

34,290

 

 

Cash and cash equivalents—beginning of period

 

 

3,489

 

 

 

5,467

 

 

 

37,488

 

 

 

8,242

 

 

 

54,686

 

 

Cash and cash equivalents—end of period

 

$

2,582

 

 

$

1,324

 

 

$

72,527

 

 

$

12,543

 

 

$

88,976

 

 

 

Condensed Consolidating Balance Sheet (in thousands)

 

 

 

As of June 30, 2013

 

 

 

 

Parent

 

 

OGIL

 

 

Subsidiary Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,230

 

 

$

230,526

 

 

$

204,381

 

 

$

4,268

 

 

$

 

 

$

440,405

 

 

Other current assets

 

 

605

 

 

 

2,125

 

 

 

162,367

 

 

 

10,960

 

 

 

 

 

 

176,057

 

 

Total current assets

 

 

1,835

 

 

 

232,651

 

 

 

366,748

 

 

 

15,228

 

 

 

 

 

 

616,462

 

 

Property and equipment, net

 

 

 

 

 

1,239

 

 

 

2,697,845

 

 

 

20,150

 

 

 

 

 

 

2,719,234

 

 

Investment in and advances to subsidiaries

 

 

654,624

 

 

 

1,437,887

 

 

 

1,056,112

 

 

 

1,692

 

 

 

(3,150,315

)

 

 

 

 

Investment in joint venture

 

 

 

 

 

 

 

 

 

 

 

32,359

 

 

 

 

 

 

32,359

 

 

Other assets

 

 

9,198

 

 

 

55,669

 

 

 

26,372

 

 

 

1,822

 

 

 

 

 

 

93,061

 

 

Total assets

 

$

665,657

 

 

$

1,727,446

 

 

$

4,147,077

 

 

$

71,251

 

 

$

(3,150,315

)

 

$

3,461,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

17,681

 

 

$

29,181

 

 

$

68,197

 

 

$

18,132

 

 

$

 

 

$

133,191

 

 

Current maturities of long-term debt

 

 

 

 

 

47,250

 

 

 

 

 

 

 

 

 

 

 

 

47,250

 

 

Intercompany (receivable) payable

 

 

(221,712

)

 

 

(911,034

)

 

 

1,112,391

 

 

 

20,355

 

 

 

 

 

 

 

 

Total current liabilities

 

 

(204,031

)

 

 

(834,603

)

 

 

1,180,588

 

 

 

38,487

 

 

 

 

 

 

180,441

 

 

Long-term debt

 

 

90,052

 

 

 

2,694,793

 

 

 

 

 

 

 

 

 

 

 

 

2,784,845

 

 

Other long term liabilities

 

 

 

 

 

 

 

 

36,204

 

 

 

6,474

 

 

 

 

 

 

42,678

 

 

Shareholders’ equity (deficit)

 

 

779,636

 

 

 

(132,744

)

 

 

2,930,285

 

 

 

26,290

 

 

 

(3,150,315

)

 

 

453,152

 

 

Total liabilities and shareholders’ equity

 

$

665,657

 

 

$

1,727,446

 

 

$

4,147,077

 

 

$

71,251

 

 

$

(3,150,315

)

 

$

3,461,116

 

 

20


 

 

Condensed Consolidating Statement of Operations (in thousands)

 

 

Three Months Ended June 30, 2013

 

 

 

 

Parent

 

 

Issuer

 

 

Subsidiary Guarantors

 

 

Non-Guarantors

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

 

$

 

 

$

159,922

 

 

$

10,715

 

 

$

170,637

 

 

Operating costs and expenses

 

 

3,192

 

 

 

(156

)

 

 

95,375

 

 

 

10,740

 

 

 

109,151

 

 

Income (loss) from operations

 

 

(3,192

)

 

 

156

 

 

 

64,547

 

 

 

(25

)

 

 

61,486

 

 

Other, net

 

 

(3,117

)

 

 

(48,091

)

 

 

(2,619

)

 

 

3,634

 

 

 

(50,193

)

 

Income (loss) before income taxes

 

 

(6,309

)

 

 

(47,935

)

 

 

61,928

 

 

 

3,609

 

 

 

11,293

 

 

Income tax provision (benefit)

 

 

 

 

 

40

 

 

 

6,793

 

 

 

244

 

 

 

7,077

 

 

Net income (loss)

 

$

(6,309

)

 

$

(47,975

)

 

$

55,135

 

 

$

3,365

 

 

$

4,216

 

 

Condensed Consolidating Statement of Operations (in thousands)

 

 

 

Six Months Ended June 30, 2013

 

 

 

 

Parent

 

 

OGIL

 

 

Subsidiary Guarantors

 

 

Non-Guarantors

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

 

$

 

 

$

298,530

 

 

$

19,108

 

 

$

317,638

 

 

Operating costs and expenses

 

 

6,856

 

 

 

(300

)

 

 

192,772

 

 

 

17,428

 

 

 

216,756

 

 

Income (loss) from operations

 

 

(6,856

)

 

 

300

 

 

 

105,758

 

 

 

1,680

 

 

 

100,882

 

 

Other, net

 

 

(6,241

)

 

 

(202,866

)

 

 

(1,846

)

 

 

3,768

 

 

 

(207,185

)

 

Income (loss) before income taxes

 

 

(13,097

)

 

 

(202,566

)

 

 

103,912

 

 

 

5,448

 

 

 

(106,303

)

 

Income tax provision (benefit)

 

 

 

 

 

79

 

 

 

12,098

 

 

 

505

 

 

 

12,682

 

 

Net income (loss)

 

$

(13,097

)

 

$

(202,645

)

 

$

91,814

 

 

$

4,943

 

 

$

(118,985

)

 

 

Condensed Consolidating Statement of Cash Flows (in thousands)

 

 

 

Six Months Ended June 30, 2013

 

 

 

 

Parent

 

 

OGIL

 

 

Subsidiary Guarantors

 

 

Non-Guarantors

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(17,876

)

 

$

(241,029

)

 

$

161,570

 

 

$

228

 

 

$

(97,107

)

 

Net cash provided by (used in) investing activities

 

 

 

 

 

(650

)

 

 

(36,160

)

 

 

(8,318

)

 

 

(45,128

)

 

Net cash provided by (used in) financing activities

 

 

3,635

 

 

 

49,737

 

 

 

21,028

 

 

 

5,514

 

 

 

79,914

 

 

Net increase in cash and cash equivalents

 

 

(14,241

)

 

 

(191,942

)

 

 

146,438

 

 

 

(2,576

)

 

 

(62,321

)

 

Cash and cash equivalents—beginning of period

 

 

15,471

 

 

 

422,468

 

 

 

57,943

 

 

 

6,844

 

 

 

502,726

 

 

Cash and cash equivalents—end of period

 

$

1,230

 

 

$

230,526

 

 

$

204,381

 

 

$

4,268

 

 

$

440,405

 

 

 

 

 

 

21


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist you in understanding our financial position at June 30, 2014 and our results of operations for the three and six months ended June 30, 2014 and 2013. The discussion should be read in conjunction with the financial statements and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain previously reported amounts have been reclassified to conform to the current year presentation.

Overview

We are an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related equipment and work crews, primarily on a dayrate basis to drill oil and natural gas wells for our customers. We also provide construction supervision services for, and will operate and manage, drilling units owned by others. Through our fleet of drilling units we provide offshore contract drilling services to major, national and independent oil and natural gas companies, focused primarily on international markets.

The following table sets forth certain information concerning our offshore drilling fleet.

 

Name

 

Ownership

 

 

Year Built/
Expected
Delivery

 

  

Water Depth
Rating (feet)

 

  

Drilling Depth
Capacity
(feet)

 

  

Status

Jackups

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

  

 

Emerald Driller

 

100

%

 

 

2008

  

  

 

375

  

  

 

30,000

  

  

Operating

Sapphire Driller

 

100

%

 

 

2009

  

  

 

375

  

  

 

30,000

  

  

Operating

Aquamarine Driller

 

100

%

 

 

2009

  

  

 

375

  

  

 

30,000

  

  

Operating

Topaz Driller

 

100

%

 

 

2009

  

  

 

375

  

  

 

30,000

  

  

Operating

 

Drillships (1)

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

  

 

Platinum Explorer

 

100

%

 

 

2010

  

  

 

12,000

  

  

 

40,000

  

  

Operating

Titanium Explorer

 

100

%

 

 

2012

  

  

 

12,000

  

  

 

40,000

  

  

Operating

Tungsten Explorer

 

100

%

 

 

2013

  

  

 

12,000

  

  

 

40,000

  

  

Operating

Cobalt Explorer

 

100

%

 

 

2015

  

  

 

12,000

  

  

 

40,000

  

  

Under construction

(1)

The drillships are designed to drill in up to 12,000 feet of water. The Platinum Explorer, Titanium Explorer and Tungsten Explorer are currently equipped to drill in 10,000 feet of water. The Cobalt Explorer will be equipped to drill in 10,000 feet of water with a dual derrick and two seven-ram blowout preventers.

Business Outlook

Expectations about future oil and natural gas prices have historically been a key driver of demand for our services. The price of oil, while volatile, remains at historically elevated levels which reflects growing demand as the economies around the world continue to show economic growth, albeit at a slow pace. The International Energy Agency estimates that demand growth for 2014 will increase by approximately 1.3 million barrels per day or 1.4%. The mid-year updates to the annual exploration and development spending surveys indicate that, while total spending growth remains consistent, the spending will be more focused on North American land exploration and development as improvements in shale drilling technology have increased the recovery of both oil and gas from shale based reserves. In one survey, the forecasted growth of exploration and development spending internationally has been reduced to approximately 1.3% as compared to 3.8% growth in the previous survey. This reduced spending, combined with the newbuild deliveries discussed below, is putting downward pressure on dayrates for offshore drilling rigs.

Our customers continue to favor newer, more technically capable rigs over older, less efficient rigs. However, during periods with a high rate of newbuild deliveries, competitors may significantly reduce the rates for the older, less efficient rigs in order to induce customers to contract their rigs. This tends to put downward pressure on dayrates for modern, high-specification assets as well, as the owners of those units reduce rates to be more competitive. The order book for jackups currently indicates that 21 additional jackups are scheduled for delivery through the end of 2014 with another 64 jackups scheduled for delivery in 2015. The order book for ultra deepwater floaters, including drillships and semisubmersibles, indicates that 19 additional floaters are scheduled for delivery in 2014 with another 27 floaters scheduled for delivery in 2015. We believe that all of the newbuild rigs will ultimately be contracted as either replacements for older rigs or through market expansion to meet growing demand.

An additional factor that impacts our ability to contract our drilling rigs is geopolitical risk.  Geopolitical risk in the Middle East, North Africa and West Africa has reduced access to these markets in recent years, leading to supply disruption. The timing and magnitude of incremental oil production from these regions potentially becoming available to the world market has made it difficult

22


 

for our customers to estimate the total oil supply and related impact on world oil prices. Additionally, the possibility of easing international sanctions against Iran could increase oil supply from the Middle East. In response to political pressure to support social agendas and promote localization of the workforce and production spending, countries in West Africa and Latin America have adopted additional local spending requirements and taxes on oil and gas producing activities, which has increased the costs of developing these oil and gas reserves. As a result, some exploration and production projects in these countries have been delayed while the new regulations and contracting requirements are evaluated.

We believe that we are well positioned for these market changes as our fleet has significant backlog for 2014 and 2015. We believe that our marketing efforts and current customer mix is also reflective of these trends as we have long-term relationships with national oil companies that have drilling programs which are expected to be less impacted by short-term volatility in the market. A summary of our backlog coverage of days contracted and related revenue is as follows:

 

 

 

Percentage of Days Contracted

 

 

 

Revenues Contracted

(in thousands)

 

 

 

 

2014

 

 

2015

 

 

 

2014

 

 

2015

 

 

Beyond

 

 

Jackups

 

 

94%

 

 

 

34%

 

 

 

$

111,252

 

 

$

80,417

 

 

$

 

 

Drillships

 

 

100%

 

 

 

100%

 

 

 

$

349,970

 

 

$

643,054

 

 

$

1,296,202

 

 

 

Results of Operations

The first two of our jackup rigs began operations under their initial contracts in February and August 2009, respectively. Our third and fourth jackup rigs commenced operations in January and March 2010, respectively. Our first drillship, the Platinum Explorer, commenced operations in December 2010. Our second drillship, the Titanium Explorer, commenced operations in December 2012. Our third drillship, the Tungsten Explorer, commenced operations in September 2013.

The following table sets forth selected contract drilling operational information for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

Jackups

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating rigs, end of period

 

4

 

 

 

4

 

 

 

4

 

 

 

4

 

 

Available days (1)

 

364

 

 

 

364

 

 

 

724

 

 

 

724

 

 

Utilization (2)

 

99.2

%

 

 

89.5

%

 

 

99.6

%

 

 

93.9

%

 

Average daily revenues (3)

$

162,057

 

 

$

186,329

 

 

$

161,718

 

 

$

167,907

 

 

Average daily revenues (4)

$

162,057

 

 

$

154,475

 

 

$

161,718

 

 

$

152,648

 

 

Deepwater

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating rigs, end of period

 

3

 

 

 

2

 

 

 

3

 

 

 

2

 

 

Available days (1)

 

273

 

 

 

182

 

 

 

543

 

 

 

362

 

 

Utilization (2)

 

83.1

%

 

 

97.3

%

 

 

89.8

%

 

 

92.9

%

 

Average daily revenues (3)

$

615,701

 

 

$

537,378

 

 

$

608,264

 

 

$

524,121

 

 

(1)

Available days are the total number of rig calendar days in the period. Newbuild rigs are included upon acceptance by the customer.

(2)

Utilization is calculated as a percentage of the actual number of revenue earning days divided by the available days in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations.

(3)

Average daily revenues are based on contract drilling revenues divided by revenue earning days. Average daily revenue will differ from average contract dayrate due to billing adjustments for any non-productive time, mobilization fees and demobilization fees.

(4)

Excluding $10.4 million termination payment for the Sapphire Driller in May 2013.

23


 

The following table is an analysis of our operating results for the three and six months ended June 30, 2014 and 2013, respectively.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

2014

 

 

2013

 

 

Change

 

 

Revenues

 

(In thousands)

 

 

Contract drilling services

 

$

198,279

 

 

$

155,803

 

 

$

42,476

 

 

$

413,211

 

 

$

290,467

 

 

$

122,744

 

 

Management fees

 

 

5,969

 

 

 

2,410

 

 

 

3,559

 

 

 

10,551

 

 

 

5,608

 

 

 

4,943

 

 

Reimbursables

 

 

15,470

 

 

 

12,424

 

 

 

3,046

 

 

 

28,421

 

 

 

21,563

 

 

 

6,858

 

 

Total revenues

 

 

219,718

 

 

 

170,637

 

 

 

49,081

 

 

 

452,183

 

 

 

317,638

 

 

 

134,545

 

 

Operating  costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

98,002

 

 

 

77,117

 

 

 

(20,885

)

 

 

199,724

 

 

 

152,434

 

 

 

(47,290

)

 

General and administrative

 

 

8,366

 

 

 

7,054

 

 

 

(1,312

)

 

 

16,481

 

 

 

14,481

 

 

 

(2,000

)

 

Depreciation

 

 

31,630

 

 

 

24,980

 

 

 

(6,650

)

 

 

63,255

 

 

 

49,841

 

 

 

(13,414

)

 

Total operating expenses

 

 

137,998

 

 

 

109,151

 

 

 

(28,847

)

 

 

279,460

 

 

 

216,756

 

 

 

(62,704

)

 

Income (loss) from operations

 

 

81,720

 

 

 

61,486

 

 

 

20,234

 

 

 

172,723

 

 

 

100,882

 

 

 

71,841

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

11

 

 

 

74

 

 

 

(63

)

 

 

24

 

 

 

170

 

 

 

(146

)

 

Interest expense and financing charges

 

 

(54,286

)

 

 

(51,255

)

 

 

(3,031

)

 

 

(108,773

)

 

 

(110,917

)

 

 

2,144

 

 

Loss on debt extinguishment

 

 

(1,407

)

 

 

 

 

 

(1,407

)

 

 

(1,513

)

 

 

(98,327

)

 

 

96,814

 

 

Other income

 

 

(539

)

 

 

988

 

 

 

(1,527

)

 

 

240

 

 

 

1,889

 

 

 

(1,649

)

 

Total other income (expense)

 

 

(56,221

)

 

 

(50,193

)

 

 

(6,028

)

 

 

(110,022

)

 

 

(207,185

)

 

 

97,163

 

 

Income (loss) before income taxes

 

 

25,499

 

 

 

11,293

 

 

 

14,206

 

 

 

62,701

 

 

 

(106,303

)

 

 

169,004

 

 

Income tax provision (benefit)

 

 

15,321

 

 

 

7,077

 

 

 

8,244

 

 

 

27,699

 

 

 

12,682

 

 

 

15,017

 

 

Net income (loss)

 

$

10,178

 

 

$

4,216

 

 

$

5,962

 

 

$

35,002

 

 

$

(118,985

)

 

$

153,987

 

 

Revenue: Total revenue increased 29% and contract drilling revenue increased 27% in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase in drilling revenue was primarily due to the commencement of operations of the Tungsten Explorer in September 2013, which added $33.8 million of revenue, and to improved performance on the Titanium Explorer in 2014, which contributed additional revenue of $10.3 million.

Jackup utilization for the three months ended June 30, 2014 increased 9.7% compared to the prior year period. Jackup utilization in the prior year was lower due to days out of service following the early termination of the Sapphire Driller contract in May 2013. Deepwater utilization for the three months ended June 30, 2014 decreased approximately 14% compared to the prior year due to the mobilization of the Tungsten Explorer to West Africa during the current quarter.

Management fees and reimbursable revenue for the three months ended June 30, 2014 were $6.0 million and $15.5 million, respectively, as compared to $2.4 million and $12.4 million in the prior year period. The increase in management fees was due to having multiple construction management services projects in 2014 and to managing the operations of two jackups for a contractor in Mexico. The increase in reimbursable revenue was primarily due to higher reimbursables on the Tungsten Explorer and the Titanium Explorer.

Total revenue for the six months ended June 30, 2014 increased 42% as compared to the six months ended June 30, 2013 and contract drilling revenue increased 42% in the first six months of 2014 as compared to the same period in 2013. The increase in drilling revenue was primarily due to the commencement of operations of the Tungsten Explorer in September 2013, which added $88.2 million of revenue, and to improved performance on the Titanium Explorer in 2014, which contributed additional revenue of $31.3 million.

Jackup utilization for the six months ended June 30, 2014 increased 5.7% compared to the prior year due to the early termination of the Sapphire Driller contract in May 2013. Deepwater utilization for the six months ended June 30, 2014 decreased approximately 3% compared to the prior year due to the mobilization of the Tungsten Explorer to West Africa during the current period.

Management fees and reimbursable revenue increased in the six months ended June 30, 2014 compared to the prior year primarily due to having multiple construction management services projects in 2014 and to managing the operations of two jackups for a contractor in Mexico.

24


 

Operating costs: Operating costs for the three months ended June 30, 2014 increased 27% compared to the three months ended June 30, 2013, due primarily to an increase in operating costs on the Tungsten Explorer of approximately $12.0 million, to an increase in reimbursable costs of $2.3 million and to increased costs of approximately $4.8 million associated with the relocation of the Titanium Explorer from the U.S. Gulf of Mexico to West Africa.

Operating costs for the six months ended June 30, 2014 increased 31% compared to the six months ended June 30, 2013, due primarily to an increase in operating costs on the Tungsten Explorer of approximately $28.6 million, to an increase in reimbursable costs of $5.5 million and to increased costs of approximately $6.5 million associated with the relocation of the Titanium Explorer to West Africa.

General and administrative expenses: Increases in general and administrative expenses for both the three and six-month periods ended June 30, 2014 as compared to the three and six-month periods ended June 30, 2013 were primarily due to increased legal fees related to ongoing litigation.

Depreciation expense: The increase in depreciation expense for the three and six-month periods ended June 30, 2014 as compared to the same periods of 2013 were primarily due to the addition of the Tungsten Explorer to our operating fleet in the third quarter of 2013.

Interest expense and other financing charges: Interest expense and other financing charges for the three-month period ended June 30, 2014 increased over the same period in 2013 primarily because we had less capitalized interest in 2014 compared to 2013. We were capitalizing interest in 2013 on the Tungsten Explorer, until it commenced operations in September 2013. Interest expense and other financing charges for the six-month period ended June 30, 2014 decreased over the same period in 2013 primarily because of the refinancing of higher interest rate debt in October 2012 and March 2013, thus reducing our overall interest rates.

We capitalized $1.2 million and $2.4 million of interest and amortization costs in the three and six-month periods ended June 30, 2014, respectively. We capitalized $3.6 million and $7.8 million of interest and amortization costs, respectively, in the three and six-month periods ended June 30, 2013. The reduction in capitalized interest was due to the Tungsten Explorer commencing operations in September 2013.

Loss on extinguishment of debt: In connection with the additional principal payment of $42.0 million in June 2014 on the 2017 Term Loan, we recognized a loss of $1.4 million resulting from the write-off of deferred financing costs of $820,000 and original debt issuance discount of $576,000. During the six months ending June 30, 2014, we repurchased in the open market $7.5 million of our 7.125% Senior Notes and recognized a loss of $117,000 resulting from the write-off of deferred financing costs.

In the six-month period ended June 30, 2013, in connection with the early retirement of the remaining $1.0 billion of our prior 11.5% Senior Notes, we recognized a loss of $98.3 million resulting from the payment of early redemption fees and consent fees of $92.3 million and the write-off of deferred financing costs of $24.0 million, which were offset by the early recognition of debt issuance premium of $18.0 million.

Income tax expense: Income tax expense was $15.3 million and $27.7 million, respectively for the three and six-month periods ended June 30, 2014, as compared to $7.1 million and $12.7 million, respectively, for the comparable periods in 2013. Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions in which we operate. The increase in taxes during the three and six-month periods of 2014 was primarily due to tax expense related to the Tungsten Explorer, which was not in operation in the comparable periods of 2013, an increase in non-deductible expenses and an increase in income in jurisdictions with high statutory rates or jurisdictions where we are taxed on a deemed profit basis. In some jurisdictions we do not pay taxes or receive benefits for certain income and expense items, including interest expense and loss on extinguishment of debt.

Liquidity and Capital Resources

As of June 30, 2014 we had working capital of approximately $111.0 million, including approximately $89.0 million of cash available for general corporate purposes. Additionally we have posted $6.6 million cash as collateral for bid tenders and performance bonds. We have approximately $257.0 million in available liquidity, including our available cash and $168.0 million available under our Credit Agreement. Under our Credit Agreement $32.0 million is reserved for letters of credit. As of June 30, 2014, we had issued letters of credit for $21.5 million.

Over the next 12 months, we are forecasting expenditures of approximately $245.3 million for principal (excluding voluntary prepayments) and interest payments on our outstanding debt, including scheduled maturities of $53.5 million on our long-term debt. For the remainder of 2014, we anticipate spending approximately $27.0 million on capital expenditures, including $15.9 million on

25


 

sustaining capital expenditures and our fleet capital spares program and $11.1 million on the Cobalt Explorer. In January 2015, we have the second milestone shipyard payment of $59.5 million due on the Cobalt Explorer. The third, and final, milestone payment is due upon delivery, which is currently expected to be in the fourth quarter of 2015. Additionally, we are currently forecasting spending an additional $36.8 million on capital expenditures, including the Cobalt Explorer, and fleet capital spares in the first six months of 2015. These amounts do not include any capitalized interest related to the Cobalt Explorer construction project. We expect to fund these expenditures from our available working capital, cash flow from operations and advances under the Credit Agreement, if necessary.

In the second half of 2014, we will be exploring financing alternatives for the remaining shipyard funding commitments for the Cobalt Explorer. We are currently pursuing drilling contracts for the Cobalt Explorer, and the timing and extent of any such contracts is a significant factor that will affect our financing alternatives, which will have a significant impact on our liquidity position in 2015.

As of June 30, 2014, our long-term debt was composed of the following:

 

 

 

June 30,

2014

 

 

December 31,

2013

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

(In thousands)

 

 

7.5% Senior Notes, issued at par

 

$

1,150,000

 

 

$

1,150,000

 

 

7.125% Senior Notes, issued at par

 

 

767,473

 

 

 

775,000

 

 

$500 million 2017 Term Loan, net of discount of $5,419 and $7,109

 

 

390,081

 

 

 

455,391

 

 

$350 million 2019 Term Loan, net of discount of $4,117 and $4,561

 

 

341,508

 

 

 

342,814

 

 

5.50% Convertible Notes, net of discount of $7,986 and $9,923

 

 

92,014

 

 

 

90,077

 

 

7.875% Convertible Notes, net of discount of $1,843 and $2,130

 

 

54,657

 

 

 

54,370

 

 

Revolving credit agreement

 

 

 

 

 

10,000

 

 

F3 Capital Note, net of discount of $13,709 and $15,602

 

 

39,791

 

 

 

37,898

 

 

 

 

 

2,835,524

 

 

 

2,915,550

 

 

Less current maturities of long-term debt and revolving credit facility

 

 

53,500

 

 

 

63,500

 

 

Long-term debt

 

$

2,782,024

 

 

$

2,852,050

 

 

In February 2014, we repurchased in the open market, and subsequently cancelled, $6.0 million of the 7.125% Senior Notes. In connection with this transaction, we recognized a non-cash charge of approximately $106,000 related to the early extinguishment of the debt. In May 2014, we repurchased, and subsequently cancelled, an additional $1.5 million of the 7.125% Senior Notes and recognized a non-cash charge of approximately $10,600 related to the early extinguishment of the debt.  

In June 2014, we made an additional principal payment of $42.0 million on the 2017 Term Loan. In connection with this payment, we recognized a non-cash charge of approximately $1.4 million related to the write-off of deferred financing costs and original issuance discount on the debt.  

We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims. We do not believe the ultimate resolution of any existing litigation, claims or disputes will have a material adverse effect on our financial position, results of operations or cash flows.

We enter into operating leases in the normal course of business for office space, housing, vehicles and specified operating equipment. Some of these leases contain options which would cause our future cash payments to change if we exercised those options.

Critical Accounting Policies and Accounting Estimates

The preparation of financial statements and related disclosures in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. While management believes current estimates are appropriate and reasonable, actual results could materially differ from those estimates. We have identified the policies below as critical to our business operations and the understanding of our financial operations.

26


 

Property and Equipment: Our long-lived assets, primarily consisting of the values of our drilling rigs, are the most significant amount of our total assets. We make judgments with regard to the carrying value of these assets, including amounts capitalized, componentization, depreciation and amortization methods, salvage values and estimated useful lives. We capitalize interest costs related to the financings of our drilling rigs while they are under construction and prior to the commencement of each vessel’s first contract, which has increased the carrying value of the drilling rigs. Our weighted average cost of capital, which is the key component used in our calculation of capitalized interest, is directly impacted by the volatility in the global financial and credit markets. The completion of a construction project has an impact on the amount of interest expense that is prospectively recognized in our results of operations. Total interest and amortization costs capitalized for assets under construction for the three and six months ended June 30, 2014 were $1.2 million and $2.4 million, respectively. Total interest and amortization costs capitalized for the three and six months ended June 30, 2013 were $3.0 million and $6.5 million, respectively.

We evaluate the realization of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized would be computed as the excess of the asset’s carrying value over the estimated discounted cash flows. Estimates of future cash flows require us to make long-term forecasts of our future revenues and operating costs with regard to the assets subject to review. Our business, including the utilization rates and dayrates we receive for our drilling rigs, depends on the level of our customers’ expenditures for oil and natural gas exploration, development and production expenditures. Oil and natural gas prices and customers’ expectations of potential changes in these prices, the general outlook for worldwide economic growth, political and social stability in the major oil and natural gas producing basins of the world, availability of credit and changes in governmental laws and regulations, among many other factors, significantly affect our customers’ levels of expenditures. Sustained declines in oil and natural gas prices, worldwide rig counts and utilization, reduced access to credit markets and any other significant adverse economic news could require us to evaluate the realization of our drilling rigs.

Debt Financing Costs: Costs incurred with debt financings are deferred and amortized over the term of the related financing facility.

Revenue: Revenue is recognized as services are performed based on contracted dayrates and the number of operating days during the period.

In connection with a customer contract, we may receive lump-sum fees for the mobilization of equipment and personnel. Mobilization fees and costs incurred to mobilize a rig from one geographic market to another are deferred and recognized on a straight-line basis over the term of such contract, excluding any option periods. Costs incurred to mobilize a rig without a contract are expensed as incurred. Fees or lump-sum payments received for capital improvements to rigs are deferred and amortized to income over the term of the related drilling contract. The costs of such capital improvements are capitalized and depreciated over the useful lives of the assets. Deferred revenue under drilling contracts was $34.6 million and $39.4 million at June 30, 2014 and December 31, 2013, respectively. Deferred revenue is included in either accrued liabilities or other long-term liabilities in our consolidated balance sheet, based upon the initial term of the related drilling contract.

We record reimbursements from customers for rebillable costs and expenses as revenue and the related direct costs as operating expenses.

Rig and Equipment Certifications: We are required to obtain regulatory certifications to operate our drilling rigs and certain specified equipment and must maintain such certifications through periodic inspections and surveys. The costs associated with these certifications, including drydock costs, are deferred and amortized over the corresponding certification periods.

Income Taxes: Income taxes have been provided based upon the tax laws and rates in effect in the countries in which operations are conducted and income is earned. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. We recognize interest and penalties related to income taxes in income tax expense.

Share-Based Compensation: We account for share-based compensation using the fair value method as prescribed under U.S. GAAP. Restricted share grants are valued based on the market price of our ordinary shares on the date of grant and the fair value attributable to share options is calculated based on the Black-Scholes option pricing model. The fair values are amortized to expense over the service period which is equivalent to the time required to vest the share options and share grants.

Use of Estimates: The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and

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liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. While management believes current estimates are appropriate and reasonable, actual results could differ from those estimates.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our rigs operate in various international locations, and thus are sometimes subject to foreign exchange risk. We may from time to time also be exposed to certain commodity price risk, equity price risk and risks related to other market driven rates or prices. The risks associated with foreign exchange rates, commodity prices and equity prices have not been significant in the first six months of 2014 as all of our drilling contracts thus far have been denominated in U.S. dollars. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk: As of June 30, 2014, we had $731.6 million of variable rate debt, net of discount of $9.5 million, outstanding. In October 2012, we entered into the 2017 Term Loan which, after amendment in November 2013, bears interest at LIBOR plus 4%, with a LIBOR floor of 1.0%. The 2017 Term Loan has scheduled debt maturities, payable quarterly, of 5% of the original principal amount in the first year and 10% in subsequent years with final maturity in October 2017. In March 2013, we entered into the 2019 Term Loan. The 2019 Term Loan bears interest at LIBOR plus 4.5%, with a LIBOR floor of 1.25%. The 2019 Term Loan has annual scheduled debt maturities of 1% of the original principal amount that are payable quarterly commencing in June 2013. The maturity date of the 2019 Term Loan is March 28, 2019. Increases in the LIBOR rate would impact the amount of interest that we are required to pay on the term loans. For every 1% increase in LIBOR above the LIBOR floor, we would be subject to an increase in interest expense of $7.4 million per annum based on June 30, 2014 outstanding principal amounts. As of June 30, 2014, the 1-year LIBOR rate was 0.55% which means the LIBOR floor is triggered and the current interest rates on the 2017 Term Loan and the 2019 Term Loan would be approximately 5.0% and 5.75%, respectively, or approximately $39.6 million per year in interest expense. We have not entered into any interest rate hedges or swaps with regards to either of the term loans.

Foreign Currency Exchange Rate Risk. As we operate in international areas, we are exposed to foreign exchange risk. Our primary foreign exchange risk management strategy involves structuring customer contracts to provide for payment in both U.S. dollars, which is our functional currency, and local currency. The payment portion denominated in local currency is based on anticipated local currency requirements over the contract term. Due to various factors, including customer acceptance, local banking laws, other statutory requirements, local currency convertibility and the impact of inflation on local costs, actual foreign exchange needs may vary from those anticipated in the customer contracts, resulting in partial exposure to foreign exchange risk. Fluctuations in foreign currencies have not had a material impact on our overall results. If we find ourselves in situations where payments of local currency do not equal local currency requirements, foreign exchange derivative instruments, specifically foreign exchange forward contracts, or spot purchases, may be used to mitigate foreign currency risk. A foreign exchange forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. We do not enter into derivative transactions for speculative purposes. As of June 30, 2014, we did not have any open foreign exchange derivative contracts or material foreign currency exposure risk.

 

Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified by the SEC rules and forms.

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, such officers have concluded that the design and operation of these disclosure controls and procedures were effective as of June 30, 2014 to provide reasonable assurance that information required to be disclosed on our reports filed or submitted under the Exchange Act was (1) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (2) recorded, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II—OTHER INFORMATION

 

Item 6. Exhibits

 

Exhibit No.

  

Description

10.1

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and Paul A. Bragg dated July 16, 2014 (Incorporated by reference to Exhibit 10.1 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

10.2

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and Douglas G. Smith dated July 16, 2014 (Incorporated by reference to Exhibit 10.2 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

10.3

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and Douglas W. Halkett dated July 16, 2014 (Incorporated by reference to Exhibit 10.3 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

10.4

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and Donald Munro dated July 16, 2014 (Incorporated by reference to Exhibit 10.4 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

10.5

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and William L. Thomson dated July 16, 2014 (Incorporated by reference to Exhibit 10.5 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

10.6

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and Christopher G. DeClaire dated July 16, 2014 (Incorporated by reference to Exhibit 10.6 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

10.7

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and Edward G. Brantley dated July 16, 2014 (Incorporated by reference to Exhibit 10.7 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

10.8

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and Michel R. C. Derbyshire dated July 16, 2014 (Incorporated by reference to Exhibit 10.8 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

10.9

 

Amended and Restated Employment and Non-Competition Agreement between Vantage Drilling Company and Mark C. Howell dated July 16, 2014 (Incorporated by reference to Exhibit 10.9 of the Company’s current report on Form 8-K filed with the SEC on July 17, 2014).

 

31.1

  

 

Certification of Principal Executive Officer Pursuant to Section 302*

 

31.2

  

 

Certification of Principal Financial and Accounting Officer Pursuant to Section 302*

 

32.1

  

 

Certification of Principal Executive Officer Pursuant to Section 906*

 

32.2

  

 

Certification of Principal Financial and Accounting Officer Pursuant to Section 906*

 

101.INS

  

 

— XBRL Instance Document *

 

101.SCH

  

 

— XBRL Schema Document *

 

101.CAL

  

 

— XBRL Calculation Document *

 

101.DEF

  

 

— XBRL Definition Linkbase Document *

 

101.LAB

  

 

— XBRL Label Linkbase Document *

 

101.PRE

  

 

— XBRL Presentation Linkbase Document *

*

Filed herewith.

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

VANTAGE DRILLING COMPANY

Date: August 5, 2014

 

By:

 /s/    DOUGLAS G. SMITH

 

 

 

 

Douglas G. Smith

 

 

 

Chief Financial Officer and Treasurer

 

 

 

(Principal Financial and Accounting Officer)

 

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